Budget Proposals for Retirement Savings—A Deterrent or Not?

April
12, 2013 (PLANSPONSOR.com) – Since the release of the proposed fiscal year 2014
budget by President Barack Obama, there have been differing opinions on how
retirement-related provisions will potentially affect retirement savings.

The proposed budget would place a cap on retirement savings,
prohibiting employees from saving more than $3 million in individual retirement
accounts (IRAs) and other retirement accounts. Analyses from the Employee
Benefit Research Institute suggest that up to 5% of retirement plan
participants could be affected by this cap (see “Savings
Caps Could Affect 5% of Participants”).

The budget would also place a cap on how much could be
deferred on a pre-tax basis, taxing participants’ savings before they are put into retirement
plans, but not eliminating the taxation of assets when they are withdrawn from
retirement plans.

Small Business Owners Will Be Limited

“We were very
concerned when last year’s budget included a double tax on contributions to
401(k) plans. Small business owners earning over $250,000 would have to pay tax
on contributions in the year the contributions are made then pay tax at the
full rate when contributions are distributed at retirement,” said Brian H.
Graff, executive director and CEO of the American Society of Pension
Professionals & Actuaries (ASPPA). “We were hoping this misguided proposal
would be eliminated in this year’s budget, but instead the Administration has
kept the double tax proposal, and added another penalty for retirement savings.”

“Now, if a small business owner has saved $3
million in his or her 401(k) account, they won’t be allowed to save any more.
Without any further incentive to keep the plan, many small business owners will
now either shut down the plan or reduce contributions for workers. This means
that small business employees will now lose out not only on the opportunity to
save at work, but also on contributions the owner would have made on the
employee’s behalf to pass nondiscrimination rules,” said Graff.

Participants Don’t Need Disincentive from Saving

Scott Macey, president and CEO of the ERISA Industry
Committee (ERIC), says the budget proposal does not consider unintended consequences.

“Individuals and
families already are struggling to save enough for retirement, and they do not
need another disincentive from saving. Moreover, the burden of calculating
whether a participant exceeds the $3 million cap would only add an additional
layer of complexity in retirement planning and would unfairly burden
participants, as well as plan sponsors.

“Policymakers should keep in mind that most monies saved in
retirement accounts are tax deferrals, and will eventually be subject to
taxation. There are also complex rules which limit the amount that highly
compensated workers can contribute to retirement plans, as well as detailed
rules that assure comparable treatment of all participants in plans. This
proposal appears to be a way to pay for other Administration spending
priorities, with no real sound policy justification.

“ERIC urges the President to withdraw this ill-advised
proposal and concentrate more on incentivizing individuals and families to save
more for retirement, rather than penalizing those who have successfully planned
for their retirement.”

Kenneth E. Bentsen, Jr., acting president and
CEO of the Securities Industry and Financial Markets Association (SIFMA), says
savings have a positive effect on capital markets as well as the quality of
life for retirees. We need to be emphasizing the importance of saving and saving early, not changing the tax rules mid-stream."

Not a Big Deterrent

Not all of the reactions over the proposed budget, however,
have been negative.

In speaking with PLANSPONSOR, Lee Topley, managing director
of Unified Trust, a Lexington, Kentucky-based wealth management and retirement
plan consulting firm, believes that the $3 million cap will “really only impact a
small percentage of participants, targeting the higher income level.”

When asked if he thought the budget provisions would discourage
someone from joining a company or participating in a retirement plan, Topley
said, “No, I don’t think so. And I don’t see someone switching jobs because of
this, since these restrictions would be everywhere.”

As to how plan sponsors would be affected, Topley said, “It
may create a burden on the plan sponsor in that this is an additional thing to
monitor. There may be questions of how this new data is tracked and who will be
responsible for tracking it. I don’t see plan sponsors changing their
contribution rates because of this. Overall, these provisions will not be a big
deterrent to an employer starting or continuing a retirement plan.”

Topley pointed to a dichotomy in the situation.
“On the one hand, we’re trying to get people to save more for retirement,” he
mused, “and on the other hand, we’re penalizing those that save well.”